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Description: CHAPTER 1: INTRODUCTION
This report examines tariff and non-tariff policies that restrict trade between countries in agricultural commodities. Many of these policies are now subject to important di...

CHAPTER 1: INTRODUCTION
This report examines tariff and non-tariff policies that restrict trade between countries in agricultural commodities. Many of these policies are now subject to important disciplines under the 1994 GATT agreement that is administered by the World Trade Organization (WTO). The paper is organized as follows. First, tariffs, import quotas, and tariff rate quotas are discussed. Then, a series of non-tariff barriers to trade are examined, including voluntary export restraints,

CHAPTER 1: INTRODUCTION

This report examines tariff and non-tariff policies that restrict trade between countries in agricultural commodities. Many of these policies are now subject to important disciplines under the 1994 GATT agreement that is administered by the World Trade Organization (WTO). The paper is organized as follows. First, tariffs, import quotas, and tariff rate quotas are discussed. Then, a series of non-tariff barriers to trade are examined, including voluntary export restraints, technical barriers to trade, domestic content regulations, import licensing, the operations of import State Trading Enterprises (STEs), and exchange rate management policies. Finally, the precautionary principle, an environment-related rationale for trade restrictions, and sanitary and phytosanitary barriers to trade are discussed.

1.1 BACKGROUND
Tariffs and Tariff Rate Quotas Tariffs, which are taxes on imports of commodities into a country or region, are among the oldest forms of government intervention in economic activity. They are implemented for two clear economic purposes. First, they provide revenue for the government. Second, they improve economic returns to firms and suppliers of resources to domestic industry that face competition from foreign imports. Tariffs are widely used to protect domestic producers’ incomes from foreign competition. This protection comes at an economic cost to domestic consumers who pay higher prices for importcompeting goods, and to the economy as a whole through the inefficient allocation of resources to the import competing domestic industry. Therefore, since

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1948, when average tariffs on manufactured goods exceeded 30 percent in most developed economies, those economies have sought to reduce tariffs on manufactured goods through several rounds of negotiations under the General Agreement on Tariffs Trade (GATT). Only in the most recent Uruguay Round of negotiations were trade and tariff restrictions in agriculture addressed. In the past, and even under GATT, tariffs levied on some agricultural commodities by some countries have been very large. When coupled with other barriers to trade they have often constituted formidable barriers to market access from foreign producers. In fact, tariffs that are set high enough can block all trade and act just like import bans. A tariff-rate quota (TRQ) combines the idea of a tariff with that of a quota. The typical TRQ will set a low tariff for imports of a fixed quantity and a higher tariff for any imports that exceed that initial quantity. In a legal sense and at the WTO, countries are allowed to combine the use of two tariffs in the form of a TRQ, even when they have agreed not to use strict import quotas. In the United States, important TRQ schedules are set for beef, sugar, peanuts, and many dairy products. In each case, the initial tariff rate is quite low, but the over-quota tariff is prohibitive or close to prohibitive for most normal trade. Explicit import quotas used to be quite common in agricultural trade. They allowed governments to strictly limit the amount of imports of a commodity and thus to plan on a particular import quantity in setting domestic commodity programs. Another common non-tariff barrier (NTB) was the so-called “voluntary export restraint” (VER) under which exporting countries would agree to limit shipments of a commodity to the importing country, although often only under threat of some even more restrictive or onerous activity. In some cases, exporters were willing to comply with a VER because

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they were able to capture economic benefits through higher prices for their exports in the importing country’s market.

1.2 ISSUES
In the Uruguay round of the GATT/WTO negotiations, members agreed to drop the use of import quotas and other non-tariff barriers in favor of tariff-rate quotas. Countries also agreed to gradually lower each tariff rate and raise the quantity to which the low tariff applied. Thus, over time, trade would be taxed at a lower rate and trade flows would increase. Given current U.S. commitments under the WTO on market access, options are limited for U.S. policy innovations in the 2002 Farm Bill vis a vis tariffs on agricultural imports from other countries. Providing higher prices to domestic producers by increasing tariffs on agricultural imports is not permitted. In addition, particularly because the U.S. is a net exporter of many agricultural commodities, successive U.S. governments have generally taken a strong position within the WTO that tariff and TRQ barriers need to be reduced.

Non-Tariff Trade Barriers Countries use many mechanisms to restrict imports. A critical objective of the Uruguay Round of GATT negotiations, shared by the U.S., was the elimination of non-tariff barriers to trade in agricultural commodities (including quotas) and, where necessary, to replace them with tariffs – a process called tarrification. Tarrification of agricultural commodities was largely achieved and viewed as a major success of the 1994 GATT

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agreement. Thus, if the U.S. honors its GATT commitments, the utilization of new nontariff barriers to trade is not really an option for the 2002 Farm Bill.

Domestic Content Requirements Governments have used domestic content regulations to restrict imports. The intent is usually to stimulate the development of domestic industries. Domestic content regulations typically specify the percentage of a product’s total value that must be produced domestically in order for the product to be sold in the domestic market (Carbaugh). Several developing countries have imposed domestic content requirements to foster agricultural, automobile, and textile production. They are normally used in conjunction with a policy of import substitution in which domestic production replaces imports. Domestic content requirements have not been as prevalent in agriculture as in some other industries, such as automobiles, but some agricultural examples illustrate their effects. Australia used domestic content requirements to support leaf tobacco production. In order to pay a relatively low import duty on imported tobacco, Australian cigarette manufacturers were required to use 57 percent domestic leaf tobacco. Member countries of trade agreements also use domestic content rules to ensure that nonmembers do not manipulate the agreements to circumvent tariffs. For example, North American Free Trade Agreement (NAFTA) rules of origin provisions stipulate that all single-strength citrus juice must be made from 100 percent NAFTA origin fresh citrus fruit.

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Again, as is the case with other trade barriers, it seems unlikely that introducing domestic content rules to enhance domestic demand for U.S. agricultural commodities is a viable option for the 2002 Farm Bill.

1.3 IMPORT LICENSES
Import licenses have proved to be effective mechanisms for restricting imports. Under an importlicensing scheme, importers of a commodity are required to obtain a license for each shipment they bring into the country. Without explicitly utilizing a quota mechanism, a country can simply restrict imports on any basis it chooses through its allocation of import licenses. Prior to the implementation of NAFTA, for example, Mexico required that wheat and other agricultural commodity imports be permitted only under license. Elimination of import licenses for agricultural commodities was a critical objective of the Uruguay Round of GATT negotiations and thus the use of this mechanism to protect U.S. agricultural producers is unlikely an option for the 2002 Farm Bill.

Import State Trading Enterprises Import State Trading Enterprises (STEs) are government owned or sanctioned agencies that act as partial or pure single buyer importers of a commodity or set of commodities in world markets. They also often enjoy a partial or pure domestic monopoly over the sale of those commodities. Current important examples of import STEs in world agricultural commodity markets include the Japanese Food Agency (barley, rice, and wheat), South Korea’s Livestock Products Marketing Organization, and China’s National Cereals, Oil

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and Foodstuffs Import and Export Commission (COFCO). STEs can restrict imports in several ways. First, they can impose a set of implicit import tariffs by purchasing imports at world prices and offering them for sale at much higher domestic prices. The difference between the purchase price and the domestic sales price simply represents a hidden tariff. Import STEs may also implement implicit general and targeted import quotas, or utilize complex and costly implicit import rules that make importing into the market unprofitable. Recently, in a submission to the current WTO negotiations, the United States targeted the trade restricting operations of import and export STEs as a primary concern. A major problem with import STEs is that it is quite difficult to estimate the impacts of their operations on trade, because those operations lack transparency. STEs often refuse to provide the information needed to make such assessments, claiming that such disclosure is not required because they are quasi-private companies. In spite of these difficulties, the challenges provided by STEs will almost certainly continue to be addressed through bilateral and multilateral trade negotiations rather than in the context of domestic legislation through the 2002 Farm Bill.

1.4 TECHNICAL BARRIERS TO TRADE
All countries impose technical rules about packaging, product definitions, labeling, etc. In the context of international trade, such rules may also be used as non-tariff trade barriers. For example, imagine if Korea were to require that oranges sold in the country be less than two inches in diameter. Oranges grown in Korea happen to be much smaller than Navel oranges grown in California, so this type of “technical” rule would effectively ban the sales of California oranges and protect the market for Korean oranges. Such rules

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violate WTO provisions that require countries to treat imports a nd domestic products equivalently and not to advantage products from one source over another, even in indirect ways. Again, however, these issues will likely be dealt with through bilateral and multilateral trade negotiations rather than through domestic Farm Bill policy initiatives.

1.5 EXCHANGE RATE MANAGEMENT POLICIES
Some countries may restrict agricultural imports through managing their exchange rates. To some degree, countries can and have used exchange rate policies to discourage imports and encourage exports of all commodities. The exchange rate between two countries’ currencies is simply the price at which one currency trades for the other. For example, if one U.S. dollar can be used to purchase 100 Japanese yen (and vice versa), the exchange rate between the U.S. dollar and the Japanese yen is 100 yen per dollar. If the yen depreciates in value relative to the U.S. dollar, then a dollar is able to purchase more yen. A 10 percent depreciation or devaluation of the yen, for example, would mean that the price of one U.S. dollar increased to 110 yen. One effect of currency depreciation is to make all imports more expensive in the country itself. If, for example, the yen depreciates by 10 percent from an initial value of 100 yen per dollar, and the price of a ton of U.S. beef on world markets is $2,000, then the price of that ton of beef in Japan would increase from 200,000 yen to 220,000 yen. A policy that deliberately lowers the exchange rate of a country’s currency will, therefore, inhibit imports of agricultural commodities, as well as imports of all other commodities. Thus, countries that pursue

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deliberate policies of undervaluing their currency in international financial markets are not usually targeting agricultural imports. Some countries have targeted specific types of imports through implementing multiple exchange rate policy under which importers were required to pay different exchange rates for foreign currency depending on the commodities they were importing. The objectives of such programs have been to reduce balance of payments problems and to raise revenues for the government. Multiple exchange rate programs were rare in the 1990s, and generally have not been utilized by developed economies. Finally, exchange rate policies are usually not sector-specific. In the United States, they are clearly under the purview of the Federal Reserve Board and, as such, will not likely be a major issue for the 2002 Farm Bill. There have been many calls in recent congressional testimony, however, to offset the negative impacts caused by a strengthening US dollar with counter-cyclical payments to export dependent agricultural products.

The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade The precautionary principle, or foresight planning, has recently been frequently proposed as a justification for government restrictions on trade in the context of environmental and health concerns, often regardless of cost or scientific evidence. It was first proposed as a household management technique in the 1930s in Germany, and included elements of prevention, cost effectiveness, and ethical responsibility to maintain natural systems (O’Riordan and Cameron). In the context of managing environmental uncertainty, the principle enjoyed a resurgence of popularity during a meeting of the U.N. World Charter for Nature (of which the U.S. is only an observer) in 1982. Its use was re-endorsed by the

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U.N. Convention on Bio-diversity in 1992, and again in Montreal, Canada in January 2000. The precautionary principle has been interpreted by some to mean that new chemicals and technologies should be considered dangerous until proven otherwise. It therefore requires those responsible for an activity or process to establish its harmlessness and to be liable if damage occurs. Most recent attempts to invoke the principle have cited the use of toxic substances, exploitation of natural resources, and environmental degradation. Concerns about species extinction, high rates of birth defects, learning deficiencies, cancer, climate change, ozone depletion, and contamination with toxic chemicals and nuclear materials have also been used to justify trade and other government restrictions on the basis of the precautionary principle. Thus, countries seeking more open trading regimes have been concerned that the precautionary principle will simply be used to justify nontariff trade barriers. For example, rigid adherence to the precautionary principle could lead to trade embargoes on products such as genetically modified oil seeds with little or no reliance on scientific analysis to justify market closure. Sometimes, restrictions on imports from certain places are fully consistent with protecting consumers, the environment, or agriculture from harmful diseases or pests that may accompany the imported product. The WTO Sanitary and Phytosanitary (SPS) provisions on technical trade rules specifically recognize that all countries feel a responsibility to secure their borders against the importation of unsafe products. Prior to 1994, however, such barriers were often simply used as excuses to keep out a product for which there was no real evidence of any problem.

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These phony technical barriers were just an excuse to keep out competitive products. The current WTO agreement requires that whenever a technical barrier is challenged, a member country must show that the barrier has solid scientific justification and restricts trade as little as possible to achieve its scientific objectives. This requirement has resulted in a number of barriers being relaxed around the world.

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CHAPTER 2: NON TARIFF TRADE BARRIERS AND NEW PROTECTIONISM LEARNING OUTCOMES
2.1 ARGUMENTS FOR FREE TRADE
The important arguments in favour of free trade are as follows: (i) Free trade leads to the most economic utilisation of the productive resources of the world because under free trade each country will specialise in the production of those goods for which it is best suited and will import from other countries those goods which can be produced domestically only at a comparative disadvantage. (Iii) As there will be intense competition under free trade, the inefficient producers are compelled either to improve their efficiency or to quit. (Iv) Free trade helps to break domestic monopolies and free the consumers from exploitation. (v) Free trade benefits the consumers.in different ways. It enables them to obtain goods from the cheapest source. Free trade also makes available large varieties of goods. (v i) Further, under free trade there is no much scope for corruption which is rampant under protection. Know Non tariff Trade Barriers and Protectionism Identify the fall and rise of protectionism Free Trade Versus Protection Free trade refers to the trade that is free from all artificial barriers to trade like tariffs, quantitative restrictions, exchange controls, etc. Protection, on the other hand, refers to the government policy of according protection to the domestic industries from foreign competition. There are a number of arguments for and against both free trade and protection. (ii) Under free trade, division of labour occurs on an international scale leading to greater specialisation, efficiency and economy in production. 11

2.2 ARGUMENTS FOR PROTECTION
Theoretically speaking, free trade has certain virtues, as we have seen above. But, in reality, government are encouraged to resort to some manner of protective measures of safeguard the national interest. There are a number of arguments put forward in favour of protection. Some of these arguments are very valid while some others are not. We provide below the gist of the popular arguments for protection. (i) Infant Industry Argument The infant industry argument advanced by Alexander Hamilton, Frederick List and others asserts that a new industry having a potential comparative advantage may no_ get started in a country unless it is given temporary protection against foreign competition. An established industry is normally much more stronger than an infant one because of the advantageous position of the established industry like its longstanding experience, internal and external economies, resource position, market power, etc. Hence, if the infant is to compete with such a powerful foreign competitor, it will be a competition between unequals and this would result in the ruin of the infant industry. Therefore, if a new industry having a potential comparative advantage is not protected against the competition of an unequally powerful foreign industry, it will be denying the country the chance to develop the industry for which it has sufficient potential. The intention is not to give protection for ever but only for a period to enable the new industry to overcome its teething troubles. The policy of protection has been well expressed in the following words: "Nurse the baby, Protect the child and Free the adult". The infant industry argument, however, has not been received favourably by some economists. They argue that an infant will always be an infant if it is given protection.

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Further, it is very difficult for a government to identify an industry that deserves infant industry protection. "The infant industry argument. boils down to a case for the removal of obstacles to the growth of the infants. It does not demonstrate that a tariff is the most efficient means of attaining the objective." J (ii) Diversification Argument It is necessary to have a diversified industrial structure for an economy to be strong and reasonably self-sufficient. An economy that depends on a very limited number of industries is subject to many risks. A depression or recession in these industries will seriously affect the economy. A country relying too much. on foreign countries runs a number of risks. Changes in political relations and international economic conditions may put the country into difficulties. Hence, a diversified industrial structure is necessary to maintain stability and acquire strength. It is, therefore, advised to develop a range of industries by according protection to those which require it. (iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by imposing import duty or quota. By imposing tariff the country expects to obtain larger quantity of imports for a given amount of exports, or conversely, to part with a lesser quantity of exports for a given amount ofim-ports. But the terms of trade could be expected to improve only if the foreign supply is inelastic. If the foreign supply is very much elastic a tariff or a quota is unlikely to improve the terms of trade, there is also the possibility that the foreign countries will retaliate by imposing counter tariffs und quotas. The validity of this argument, is therefore, questionable. (v) Anti-Dumping Protection is also resorted to as an anti-dumping measure. Dumping, certainly, can do harm to the domestic industry; the relief the consumers get will only be temporary. It is possible that after ruining the domestic industry by dumping, the foreign

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firms will obtain monopoly powers and exploit the home market. Sometimes, dumping represents a transmission of the recession abroad to the home country. These factors point out the need to protect domestic industries against dumping. (vi) Bargaining It is argued that a country which already has a tariff can use it as a means of bargaining to obtain from other countries lower duties on its . exports. It has been pointed out, however, that the bargaining lever, instead of being used to gain tariff concessions from foreign powers, may be employed by others to extract additional protection from the home government. (vii) Employment Argument Protection has been advocated also as a measure to stimulate domestic economy and expand employment opportunities. Restric-tion of imports will stimulate import competing industries and its spread effects will help the growth of other industries. These, naturally, create more employment opportunities. This method of employment generation, however, has some problems. First, when we reduce imports from foreign countries employment and income will shrink abroad and this is likely to lead to a fall in the demand for our exports. Secondly, the foreign countries will be tempted to retaliate in order to protect their employment. (viii) National Defense Even if purely economic factors do not justify such a course of action, certain industries will have to be developed domestically due to strategic reasons. Depending on foreign countries for our defense requirements is rather foolish because factors like change in political relations can do serious damage to a country's defense interest. Hence, it is advisable to develop defense and other industries of strategic importance by providing protection if they cannot survive without protection.

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(ix) Key Industry Argument It is also argued that a country should develop its own key industries because the development of other industries and the economy depends a lot on the output of the key industries. Hence, if we 40 not have our own source of supply of key inputs, we will be placing ourselves at the mercy of the foreign suppliers. The key industries should therefore be given protection if that is necessary for their growth and survival. (iv) Improving Balance of Payments This is a very common ground for protection. By restricting imports, a country may try to improve its balance of payments position. The developing countries, especially, may have the problem of foreign exchange shortage. Hence, it is necessary to control imports so that the limited foreign exchange will be available for importing the necessary items. In developing countries, generally, there is a preference for foreign goods. Under such circumstances it is necessary to control unnecessary imports lest the balance ofi payments position become critical. The arguments mentioned above have been generally regarded as 'serious'. There are, however, a number of other arguments also which have been branded as 'nonsense', 'fallacious', 'special interest', etc. Common among them are the following: (xi) The Pauper Labour Argument The essence of this argument is that if in the home country the wage level is substantially high compared to foreign countries, the foreign producers will dominate the home market because the cheap labour will allow them to sell goods cheaper than the domestic goods and this will affect the interests of the domestic labour. This argument does not recognize the fact that high wages are usually associated with high productivity. Further, labour cost differences may not be a determining factor.

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(x) Keeping Money at Home This argument is well expressed in the form of a remark falsely attributed to Abraham Lincoln: "I do not know much about the tariff, but I know this much: When we buy manufactured goods abroad we get the goods and the foreigner gets money. When we buy the manufactured goods at home we get both the goods and the money". As Beveridge rightly reacted, this "...argument has no merits; the only sensible words in it are the firsteight word." The fact that imports are ultimately paid for by exports clearly shows that the 'keeping money at home' argument for protection has no sense in it. (xii) Size of the Home Market It is argued that protection will enlarge the market for agricultural products because agriculture derives large benefits not only directly from the protective duties levied on competitive farn1 products of foreign origin but also, indirectly from the increase in the purchasing power of the workers employed in industries similarly protected. It may be pointed out against this that protection of agriculture will harm the non-agriculturists due to the high prices of agricultural products and the protection of industries will harm agriculturists and other consumers due to high prices encouraged by protection. (xiii) Equalisation of Costs of Production Some protectionists have advocated import duties to equalise the costs of production between foreign and domestic producers and to neutralise any advantage the foreigner may have over the domestic producers in terms of lower taxes, cheaper labour, or other costs. "This argument allegedly implies a spirit of 'fair competition', not the exclusion of imports. When, however, by reason of actual cost structure or artificial measures, costs of production become identical, the very basis of international trade disappears. The logical consequence of this pseudo-scientific method

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is the elimination of trade between nations. Thus, the equalisation of costs of production argument for protection is utterly fallacious and is one of the most deceitful ever advanced in support of protection. (xiv) Strategic Trade Policy Strategic trade policy which advocates protection and government cooperation to certain high-tech industries in the developed countries is somewhat similar to the infant industry argument applied to the developing countries. The argument is that government support should be ac-corded to gain comparative advantage in the high technology industries which are crucial to the future of the nation such as semiconductors, computers, telecommunications, etc. It is also argued that State support to certain industries become essential to prevent market monopolisation. For example, outside the former Soviet Union, only three firms build large passenger jets. If European governments do not subsidise the Airbus Industries, only the two American companies, Boeing Company and Mc-Donnell-Douglas Corporation, will remain. The oft cited examples of industries developed with the support of the strategic trade policy include the steel industry in Japan in the 1950s, semiconductors in the 1970s _nd 1980s, and the development of the supersonic aircraft, Concorde, in Europe in the 1970s and the development of the Airbus aircraft in the 1980s. As Salvatore observes, while strategic trade policy can theoretically improve the market outcome in oligopolistic markets subject to extensive economies and increase the nation's growth and welfare, even the originators and popularisers of this theory recognise the serious difficulties in carryingl it out. The following difficult\es are pointed out/ in particular. First, it is extremely difficult to choose the wimiers (i.e. choose the industries that will provide large externaly economies in the future) and devise appropriate policies

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to successfully n\lrture them. Secondly, since most leading nations undertake strategic trade policies at the same time, their efforts are largely neutralised so that the potential benefits to each may be small. Thirdly, when a country does achieve substantial success with strategic trade policy, this comes at the expense of other countries (i.e., it is a 'beggar-thy-neighbour' policy) and so, other countries are likely to retaliate. The following defects are generally attributed to protection: (i) Protection is against the interest of consumers as it increases price and reduces variety and choice. (ii) Protection makes producers and sellers less quality conscious. (iii) It encourages domestic monopolies. (iv) Even inefficient firms may feel secure under protection and it discourages' innovation. (v) Protection leaves the arena open to corruption. (vi) It reduces the volume of foreign trade.

2.3 FALL AND RISE OF PROTECTIONISM
The period of over two-and-a-half decades until the early 1970s witnessed rapid expansion of the world output and trade. World trade, in fact, grew much faster than the output. After the Second World War, there was a progressive trade liberalisation until the early seventies. Thanks to the efforts of GATT, the "tariff reductions in the industrial countries continued even after this. The average levels of tariff on manufactures in industrial countries is now about 3 per cent compared to 40 per cent in 1947.

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2.4 DEMERITS OF PROTECTION
(vii) Protection leads to uneconomic utilisation of world's resources, Although the period until the early 1970s was characterised by trade liberalisation in general, there were several exceptions. In the developed countries, heavy protection was given to the agricultural sector through import restrictions and domestic subsidies. Further, in manufactured goods, textiles and clothe ing were subject to heavy protection. There was also protection associated with regional trade agreements like the EEC. Imports to developing countries were in general highly restrictive due to reasons such as balance of payments problems and the need to protect infant industries. In the industrial countries, anti dumping and counterveiling duties began to assume more importance since the midsixties. The overall trend in the industrial countries, however, was one of liberalisation. This trend was reversed in the seventies. Since about the mid-seventies, protectionism has grown alanllingly in the developed countries. This has taken mainly the fonn of non-tariff barriers (NTBs). The main reason for the growing protectionism in industrialised countries is the increasing competition they face from Japan and developing countries like, for example, the South-East Asian countries. Due to the fact that the competition has been very severe in the case of labour intensive products, the import competing industries in the advanced countries have been facing the threat of large retrenchments. Several other industries, like the automobile industry in the US, have also been facing similar problems. The demand for protection has, therefore, grown in the industrial countries in order to protect employment. Protective measures have also been employed to pressurise Japan and the

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developing countries to open up their markets for goods, services and investments of the industrial countries. As mentioned earlier, the NTBs affect the exports of developing countries much more than those of the developed ones. In other words, the main target of the developed country import restrictions in the last two decades, or so, has been the developing countries. By 1987, NTBs were estimated to have affected almost a third of OECD imports from developing countries.4 While developing countries as a group now face tariffs .10 per cent higher than the global average, the least developed countries face tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest potential for the poorest countries, such as textiles, leather and agricultural commodities. Labour intensive products like textiles, clothing and footwear are among the most highly protected imports. The restriction on the textiles and clothing, which account for nearly one-fourth of the developing country exports, has been' exercised mainly by the MultiFibre Arrangement (MFA) which denies the developing countries an estimated $ 24 billion a year in terms of export earnings. Tariff escalation (i.e. increase in tariffs with the level of processing) is yet another important factor which discourages developing countries' manufactured goods. For example, while the tariff on raw sugar is less than 2 per cent, it is around 20 per cent for processed sugar products. The tariff escalation discourages the developing countries' graduation as exporters of manufactured goods from commodity exporters. Tariff escalation affects a wide variety of products such as jute, spices, vegetables, vegetable oils, tropical fruits beverages, etc.

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As the industrial countries face more competition, they increase protectionism. This encourages one to think that they wanted free trade only as long as they enjoyed a dominant position; when their dominance is challenged they increase the trade barriers giving one or another reason. One should not be surprised if tomorrow they restrict the imports from developing countries arguing that the cost advantage of the developing countries is because of the 'injustice' done to the labour by paying wages lower than that in the US or other industrial countries! Ironically, industrial countries are increasing trade restrictions while the developing countries are liberalising trade. Trade restrictions prove costly not only for the affected exporting country but also for the importing country restricting the trade. The consumers often pay a heavy price for protection. It is estimated that overall the American consumers pay as much as $ 75 billion a year more for goods on account of import fees and restrictions-a sum roughly equivalent to about a sixth of the US import bill. In Canada every dollar earned by workers who continue to hold their jobs because of protection of the textile and clothing industries costs society an estimated $ 70. In the United States, consumers paid $ 1,14,000 a year for each job saved in thc steel industry.

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CHAPTER 3: DOHA ROUND OF NEGOTIATIONS
The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was launched in 2001 at Doha, Qatar to be completed by December 2004. But, the Development Round could not be completed by the targetted date as member countries failed to arrive at a consensus on core issues in the Round. The Hong Kong Ministerial meeting of the WTO in December 2005 ended with a new deadline of completing the Doha Round by December 2006. The negotiations were, however, deadlocked in July 2006. In January 2007 at Davos, Switzerland 30 trade ministers including India met and decided to take the Doha Agenda forward and get back to the negotiating table. Negotiations then began from February 2007 and major players commenced intense discussions in the core areas of agriculture, industrial goods and services besides discussions on rules and trade facilitation. Since January 2008 there has been a sense of urgency among the negotiators to conclude the Round this year since they believe that this is the last window of opportunity available if they want the Doha Round to succeed. Any delay now may lead to the Round being suspended for atleast a couple of years. Since March-April 2008 there has been significant progress in the negotiations and countries seem to be interested in striking a deal. The Director General of WTO, Mr Pascal Lamy has used all platforms available to him to push the key member countries towards a consensus. There are indications that Mr Lamy may convene a Ministerial meeting in end-May 2008 to finalize a deal.

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3.1 CII AND THE DOHA ROUND
CII supports the negotiations for liberalizing trade under the DDA and urges negotiators to complete the Round at the earliest. The DDA is a Development Round. CII endorses the view that success and ambition in the Doha Round will be measured by real market access provided to developing and least developed countries by the advanced countries. Negotiators will have to take care that the main pillars of the Development Round namely “Special and Differential Treatment” and “Less than Full Reciprocity” available to developing countries are fully reflected in the modalities in all the pillars of the DDA..

3.2 NON-AGRICULTURAL MARKET ACCESS (NAMA)
Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of multilateral trade negotiations under the GATT, and remains central to the objectives agreed in Doha. The DDA focuses on two main issues under NAMA negotiations. 1. Tariff reduction commitments 2. Elimination of Non-Tariff barriers According to Doha Agenda tariff reductions will take place according to a general formula, but sectoral agreements to further harmonise or eliminate tariffs could also be reached. Practically all products should be covered by these reductions, which will be made from existing bound tariffs rates (Furthermore, developed countries are encouraged to eliminate low duties (so called nuisance duties). Non ad valorem duties are to be converted to ad valorem equivalents. The final duties should be based on the Harmonized System (2002). The reference period for import data will be 1999-2001.

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The DDA is very explicit on the principle of “less than full reciprocity” commitments and “Special and Differential Treatment” that is available to developing countries and it is an important component of the negotiations on NAMA. They may exempt up to 10 percent of their tariff lines from the agreed reductions or keep up to five percent of their tariff lines unbound. The least developed countries do not have to make any tariff reductions at all, but are expected to substantially increase their level of binding. Industrial countries are in return to remove tariffs and quotas for all industrial goods from the least developed countries. Since the Hong Kong Ministerial meeting in December 2005, member countries of WTO have agreed on the following main areas in NAMA: All member countries would adopt a Swiss Formula with different coefficients for developed and developing countries. As per the formula the coefficient adopted for a country will be the tariff level of that country. The coefficients that have been discussed as per the last paper in February 2008 from the chairperson of the negotiating group, Mr Don Stephenson, the developed countries would have a coefficient of 8-9 and developing countries would have a coefficient of 19-23. Members agreed that ‘Special and Differential’ treatment for developing countries including flexibilities and ‘less than full reciprocity’ in tariff reductions will be an integral part of the modalities. It was decided to extend duty and quota free access for at least 97 percent of products for the least developed countries (LDCs) by 2008. Members also agreed to declare sectoral initiatives as non- – mandatory.

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This means that the countries decided that any initiative to eliminate customs duties on specific sectors should not be binding on countries. However, it was also decided that sectorals would be decided on the basis of a critical mass of countries joining these negotiations. Critical mass would mean that all countries, which constitute about 90% of global trade in that sector would be part of the negotiations. The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated. At the Hong Kong ministerial, all member states were asked to submit negotiating proposals as soon as possible. Negotiations will include request/offer and horizontal or vertical (sectoral) approaches. A US paper was tabled in early 2008 requesting of negotiations on remanufactured goods. There have been several rounds of discussions on this issue and most countries do not

CII POSITION CII strongly believes that flexibilities and S and D treatment for developing countries should be reflected in the final outcome of the NAMA negotiation. This means developing countries like India should have longer implementation periods for cutting tariffs and should be subjected to lower percentage cuts in tariffs when compared to developed country members. CII is of the view that developing country members should have the flexibility of keeping at least five to seven per cent of their sensitive tariff lines unbound. CII supports having a coefficient in the Swiss formula for cutting industrial tariffs, which respects the “less than full reciprocity” principle in Doha Development Agenda for

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developing countries. CII is of the view that there should be a 25-point difference between the coefficients of developed and developing countries. CII will like to see some real market access commitments from developed country members in areas of interest to developing countries with a view to remove tariff escalation and tariff peaks. Textiles and Clothing is one important sector for Indian industry. Developed countries should consider abolishing “Nuisance tariffs” of less than 3 percent. CII supports elimination of all non-tariff barriers to trade in goods around the world. A mechanism of national contact points for consultation and mediation should be set up to solve NTB implementation problems. CII does not support sectoral negotiations and is of the view that any discussion on this issue should be after the coefficients are decided. CII does not support the US paper on re-manufactured goods, which calls for equating remanufactured goods with new goods.

3.3 SERVICES
The General Agreement on Trade in Services (GATS) contains a “built-in agenda” (Article 19) mandating Members to initiate market access liberalization negotiations on services. The Doha Ministerial Declaration refers to these guidelines as “the basis for continuing the negotiations”. Members have followed a request-offer approach to these negotiations for market access.

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However, the offers on the table for liberalizing the services regime in most countries, especially the developed ones, have been mainly below expectations. This is one area of negotiations that has not witnessed progress despite several reminders and statements by ministers and senior negotiating officials. During the negotiations it has been decided that : Progressive liberalisation will be achieved through negotiation with appropriate flexibility for members. There will be plurilateral requests in addition to the bilateral request-offer approach. Groups of Members presenting plurilateral requests to other Members should submit such requests by 28 February 2006 or as soon as possible thereafter.

CII Position Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular interest to CII and it will like higher commitments from developed country members in these modes of supply of services. Member countries of WTO need to address market access issues related to domestic regulation and address issues such as economic need tests for granting work permits under Mode 4 i.e. for temporary movement of persons. Mode 4 should not be related to immigration issues and should be looked upon as short-term visas for delivering contractual services. CII feels that wage parity should not be a pre-condition of entry for contractual service providers and independent professionals.

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Greater emphasis needs to be laid on mutual recognition of professional degrees by countries Simplification and harmonisation of national regulations should be targeted. CII will like to see more access for independent professionals and not just intercompany transfers. Electronic commerce should remain duty-free and should not be discriminated against as compared to other modes of delivery.

3.4 AGRICULTURE
Agriculture is the main driver of the negotiations under the DDA. These negotiations assume tremendous importance since it involves the two critical issues for development – food security and livelihood concerns in developing and least developed countries. The DDA focuses on three important areas for liberalizing trade in agriculture goods and commodities across the globe. Tariff reductions Substantial reductions in domestic support Elimination of exports subsidy CII Position CII calls for elimination of all distortions in trade in agricultural goods and commodities CII urges developed country members to remove all high tariffs in agricultural products

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CII will like to see substantial reduction in all domestic support (regardless of box classification) provided by developed country members by 2010. CII believes that support in any form or colour is not entirely free from having some element of trade distortion. CII urges developed countries to offer deeper cuts to its farm tariff and designate only 1% of tariff lines as sensitive. CII urges member countries to protect the food security and livelihood concerns of farmers in developing and least developed countries. CII will like to see the components of sensitive and special products strengthened for developing country members to address the problems of small and subsistence farmers. CII believes that the designation of special products by developing countries would require maximum flexibility. Developing countries may be given special and differential treatment for border protection and internal support measures in order to secure domestic food supply.

3.5 TRADE FACILITATION
The Trade Facilitation Agreement is the only Singapore issue that has survived in the Doha Round. In the WTO agreement of July 2004 it was decided that trade facilitation will be a new item of negotiations on the Doha agenda. The objectives of the negotiations are “to clarify and improve relevant aspects of Articles V, VIII and X of the GATT 1994, with a view to further expediting the movement, release and clearance of goods, including goods in transit”.

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The negotiations are to ensure special efforts to support capacity building in developing countries, and to promote cooperation between customs and other authorities. Developing countries are expected to make reasonable contributions and the least developed countries are only to be required to make contributions consistent with their own needs and capabilities. The negotiations have come off to a good start, and there is good hope of having a substantial agreement on trade facilitations as a substantial part of the Doha Round package. The trade facilitation agreement is important to the establishment of an improved and more efficient management process for international trade in goods on a global basis.

CII Position CII supports the on-going negotiations on Trade Facilitation and urges negotiators to quickly identify ways and means to simplify procedures for easier movement of goods through customs and border controls. Information submitted in one system, including approved internal company systems, should automatically be used also for other systems, and so-called Single Window systems should be introduced. A WTO Agreement on Trade Facilitation should include provisions to achieve the objectives of increased transparency, predictability and speed. Internet-based information and clearance procedures should be promoted. A WTO agreement must also allow for efficient payment systems to be used, and customs valuation should be based on the invoice price.

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CHAPTER 4: TARIFF AND NON-TARIFF BARRIERS BENEFIT DEVELOPING COUNTRIES - NEW STUDY
There is considerable evidence for the hypothesis that under certain conditions, restrictions on trade can promote growth, especially of developing countries, according to a study published in the Journal of Development Economics. The study by Halit Yanikkaya, an academic at the College of Business and Administrative Services, Celal Bayar University (Turkey), has examined the growth effects on 108 economies of a large number of measures of trade openness, using the same yardsticks or measures of openness and over the same periods, and applying econometric models and regressions. The study has used two broad categories: measures of trade volumes and measures of trade restrictions and measures their effects on growth in the 108 economies. The study and the results of the data analysed challenges what the author calls “the unconditional optimism in favour of trade openness among the economic profession and policy circles.” It finds that on the basis of trade volumes, there is a positive and significant association between trade openness and growth. According to the conventional view and studies on the growth and trade restrictions, trade restrictions have an “adverse association between trade barriers and growth.”

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The study finds a contrary evidence and says: “our estimation results from most specifications (of tariff and trade barriers) show a positive and significant relationship between trade barriers and growth”. “Equally important,” the study adds, “these results are essentially driven by developing countries, and thus consistent with the predictions of the theoretical growth literature that certain conditions, developing countries can actually benefit from trade restrictions.” Several empirical studies of the ‘80s and ‘90s provided an affirmative answer for the view that “open economies” grew faster than closed ones, and that “outward-oriented” economies have consistently higher growth rates than “inward-oriented” ones. These led to a strong bias in favour of trade liberalisation and under-pinned the World Bank/IMF policy conditionalities and advice to developing countries and the Washington Consensus of the 1990s. Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the tragic failures of the import substitution strategies especially in the 1980s, and the overstated expectations from trade liberalization. The World Bank- sponsored studies, by Dollar and others, said they had found positive correlations between open economies and faster growth across countries. The first major challenge from academia came from Dani Rodrik, and followed by a cross-country empirical analysis, using the same measures of ‘openness’ across a range of countries, which brought out that these studies had reached the conclusion of open economies growing faster because they used different yardsticks for countries and over

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different time-periods: But when the same yardsticks were used and over the same timeperiods, the results showed that fast growth had taken place in some of the countries with higher trade restrictions (India and China), but which had adopted a measured approach to trade liberalization (after creating capacity domestically, and calibrating liberalization measures). Since then a number of studies have come out challenging the view that liberalization of trade and investments is always a plus and there is growth in the long-run. These studies have brought out that openness to external trade and trade liberalization are two different concepts, and that the latter promoted growth (and brought in foreign direct investment and associated technology) only under certain conditions, and when the host-country State played an active role. The Yanikkaya study notes that while there is a near consensus about the positive correlation between trade flows and growth, the theoretical growth literature (which studied growth effects of trade restrictions) came to the view that the effects were very complicated in the most general case, and mixed in how trade policies play a special role in economic growth. This, the author attributes to the way ‘openness’ is described very differently in various studies, making classification of countries on basis of ‘openness’ a formidable task. Hence, using different measures of openness produces differing results. The Yanikkaya study looks at the growth effects on a large number of measures of trade openness. Two broad measures of trade openness are used and studied: one is on effect of

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various measures on trade volumes, which indicate a positive and significant association between openness and growth, and is in line with conclusions of empirical and theoretical growth literature. However, the estimation results for various measures for trade barriers, contradicts the conventional view on the growth effects of restrictions, and suggests “an adverse association between trade barriers and growth. The estimation results from most measures of trade restrictions show a positive relationship between trade barriers and growth, a result driven by developing countries. These results are consistent with the predictions of theoretical growth literature, namely, that under certain conditions, developing countries can actually benefit from trade restrictions. In a survey of the literature, the study finds that international trade theory (based on static trade gains) provides little guidance to the effects of international trade on growth and technical progress, the new trade theory argues that gains from trade can arise from several fundamental sources differences in comparative advantage and economy-wide increasing returns. While there are many studies about the effects of trade policies on growth - during the failed import substitution strategies of the 1980s and the export-promotion policies - there is a lack of clear definition of ‘trade liberalization’ or ‘openness’. The most difficult has been measuring ‘openness’. An ideal one would be an index that includes all trade barriers distorting international trade, such as average tariff rates and

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indices of non-trade barriers. Such an index, incorporating effects of both tariff and nontariff measures has been developed by J.E.Anderson and J.P.Neary. But it is not available for a large number of economies. Other studies, like those by Dollar and, Sachs and Warner used available data. If the growth engine is driven by innovation and introduction of new products, then developing countries should benefit more by trading with developed countries than with other developing countries. However, the Yanikkaya study results do not support this, both providing growth regressions positively and significantly. The study finds that a developing country benefits through technology diffusion by trading with a developed country, and since the US is the leader in technology, developing countries benefit through this bilateral trade. Also, countries with higher population densities tend to grow faster than those with lower densities. In using measures of trade restrictions - several of whom it acknowledges are not free from measurement errors - the study reaches some very different conclusions than conventional trade theory suggests. Thus, it finds that trade barriers in the form of tariffs can actually be beneficial for economic growth. In the current context (of the Doha Round and the drive of Europe and the US to tear down and harmonise developing country tariffs), this is a significant and telling result, providing support for the viewpoint of developing countries in these talks. The framework for modalities for tariff liberalisation in industrial products in the NAMA negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

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to be opposed and jettisoned. When export taxes and total taxes on international trade are used as a measure of trade restrictions, the study finds that save for fixed effect estimates, there is a “significant and positive association” between trade barriers and growth. This is similar to the results for average tariffs. On non-tariff barriers, there are difficulties of estimation because of data limitations; hence these are excluded in most empirical studies. But studies by J.Edwards (cited in the Yanikkaya study) found such restrictions having an insignificant relationship with growth, and came to the view that NTBs are poor indicators of trade orientation, since a broad coverage of NTBs did not necessarily mean a higher distortion level. Using several new measures of trade openness and restrictions now available, and applying them on a framework model explained in details (but needs econometric knowledge for the lay trade person to test and see), the Yanikkaya study, says that there is “considerable evidence for the hypothesis that trade restrictions can promote growth, especially in developing countries, under certain conditions.” The study makes clear that it has no intention of establishing a simple and straightforward positive association between trade barriers and growth, but rather to show that “there is no such relationship between trade restrictions and growth.” Such a relationship depends mostly on the characteristics of a country. Restrictions can benefit a country depending on whether it is developed or developing (a developed one seems to lose), whether it is a big or small country, and whether it has comparative advantage in sectors receiving protection

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CHAPTER 5: CASE STUDY
NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA: FICCI
India’s exports of pharmaceuticals could make a significant dent in the Chinese market and help meet overall trade expectations of US$ 30 billion by 2009, provided Non Tariff Barriers in the shape of procedural, legal and cultural barriers that hinder market access are removed, according to FICCI. Based on feedback received from pharma exporting companies, FICCI has called for urgent steps to streamline customs procedures as well as efficient and effective use of technology for electronic data interface in customs administration and information exchange. A bilateral pre-shipment inspection agreement would also benefit both countries. FICCI has suggested that recognition agreements on standards should be arrived at and full details of standards should be made easily available. It has recommended that the various non-tariff barriers be identified and addressed and both countries act to remove them in a time bound framework. Easier trade financing and greater cooperation between the EXIM banks of the two countries would also work to the benefit trade between the two countries. In this context, it is important to note that Indian exports of drug, pharmaceuticals and fine chemicals to markets such as the US, Europe, Africa and South America have grown by 19% year-on-year in the last three years while the world average growth rate for this

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sector is about 6%. In contrast, in the last three years India’s exports to China have grown at just 3%. From US$ 94 million in 2002-03, Chinese imports from India have grown to US$ 106 million in 2003-04 to US$ 109 million in 2004-05. This accounts for barely 2%3% of Indian exports of drugs and pharmaceuticals to the world. This indicates that the high-performing Indian pharma sector has not found the environment conducive for achieving similar growth with China.

Procedures for product and company registration and for procuring Import Drug License are expensive and time consuming. Over and above the official cost of US 7000 per product, they can cost anywhere between US$ 20,000 to $40,000 per product. Besides, it may take 18 months to three years to procure an Import Drug Licence. These licences and registration are essential for beginning to export or ship goods even to factories owned by the companies that are situated in China. This is a considerable deterrent for Indian entrepreneurs to initiate exports to China.

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Long customs procedures, re-inspections and discriminatory packaging & labelling regulations that even specify the colour used for packaging, result in delays and higher costs and most of all consume energy and patience.

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The banking procedures for foreign players, particularly for remittance of foreign exchange, are tough and tedious. Even the sight payments are remitted after a

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minimum of 30 to 45 days due to the foreign exchange declaration system of Chinese banks.
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Once in the Chinese market, the drug distribution is mostly through hospitals. In practice, locally produced drugs are preferred and this manifests in the form of red tape for Indian pharma products.

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Intellectual Property Rights acts as another restrictive non-tariff trade barrier. China surpassed the US as the world’s most litigious country for IP disputes in 2005, with 13,424 cases filed with Chinese courts compared to 10,905 cases filed in the US during the same period. International companies were involved in only 268 of the IP cases filed in China last year, which represents an increase of 76% over the number in 2004. This overly cautious approach in seeking IP enforcement by international companies in China is partly due to their unfamiliarity with Chinese civil litigation.

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Lack of transparency in information about local markets and trade statistics add to the low awareness of foreign businesses in China. This lack of transparency clouds insight into the Chinese market and hampers marketing strategies of Indian pharma companies in China.

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In all of the above, language is a major barrier to trade. There are very few Chinese-speaking people in India that can be resourced as interpreters. Although the number of Chinese who are learning English is growing, communication remains a major impediment to trade.

While China has consistently complained about anti-dumping cases in India. India has responded by delivering on its words and this is no longer a bone of contention between

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the two nations. It is for the Chinese now to set the ground rules right and ensure that all non-tariff barriers are removed. At the same time, China needs to ensure that the quality standards are maintained in pharmaceutical products. India has the largest number of USFDA approved plants outside the US. There more than 75 plants which are also WHO GMP (Good Manufacturing Practices) certified and could easily cater to the demand for high quality pharma products.

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CONCLUSION
When export taxes and total taxes on international trade are used as a measure of trade restrictions, the study finds that save for fixed effect estimates, there is a “significant and positive association” between trade barriers and growth. This is similar to the results for average tariffs. On non-tariff barriers, there are difficulties of estimation because of data limitations; hence these are excluded in most empirical studies. Such restrictions having an insignificant relationship with growth, and came to the view that NTBs are poor indicators of trade orientation, since a broad coverage of NTBs did not necessarily mean a higher distortion level. Using several new measures of trade openness and restrictions now available, and applying them on a framework model explained in details (but needs econometric knowledge for the lay trade person to test and see), the Yanikkaya study, says that there is “considerable evidence for the hypothesis that trade restrictions can promote growth, especially in developing countries, under certain conditions.” The study makes clear that it has no intention of establishing a simple and straightforward positive association between trade barriers and growth, but rather to show that “there is no such relationship between trade restrictions and growth.” Such a relationship depends mostly on the characteristics of a country. Restrictions can benefit a country depending on whether it is developed or developing (a developed one seems to lose), whether it is a big or small country, and whether it has comparative advantage in sectors receiving protection.